1st year commerce economics 2011 pvt notes

1. 2011 Private:
SECTION “B”
SHORT QUESTION & ANSWER
MICROECONOMICS
2. Attempt any five of the following.
Q1.Name the laws of returns & laws of costs?
Answer. Laws of returns:
There are three laws of returns. They are,
1) Law of increasing returns.
2) Law of diminishing returns,
3) Law of constant returns.
Laws of costs:
1) Law of decreasing cost.
2) Law of increasing cost.
3) Law of constant cost.
Q2.Described the relative importance of the factors of production?
Answer.Importance of factors of production:
Factors of production unable the production of goods and services to take place and the
satisfaction of human wants.
There are four factors of production are,
1) Land.
2) Labor.
3) Capital.
4) Organization.
Q3.Distinguish between perfect competition & monopoly?
Answer. Perfect competition:
1) Difference in number of seller.
2) Difference of price taker and price maker.

2. 3) Difference of normal profit and sample normal profit, long run – normal profit, short
run- super normal.
4) Price is smaller output is lighter.
5) Production of public welfare.
6) Free entry and exit.
Monopoly:
1) Only one seller against a large number of buyer price makers.
2) Short run of long run.
3) Super normal profit.
4) Price is higher and output is smaller.
5) Consumers have to pay higher.
6) Price in monopoly.
Q4. Define Marginal utility?
Answer. Marginalutility :
Marginal utility is the utility of an extra or
additional unit. It is that point where the consumer hesitates, being on the margin of doubt,
whether it will be worthwhile to buy more of that or to spend the money on something else. It
is the point where the utility derived from the goods is equal to its price.
Q5.Differentiate between Stock & Supply?
Answer. Stock:
Stock is that totally quantity of goods which the producer or seller intend to sell
at a particular reserve price in a specific period of time. A stock (also known as equity or a
share) is a portion of the ownership of a corporation. A share in a corporation gives the owner
of the stock a stake in the company and its profits. If a corporation has issued 100 stocks in
total, then each stock represents a 1% ownership in the company.
Supply:
Economists have a very precise definition of supply. Economists describe supply as the
relationship between the quantities of a good or service consumers will offer for sale and the

3. price charged for that good. More precisely and formally supply can be thought of as "the total
quantity of a good or service that is available for purchase at a given price."
Q6.Distinguish between fixed costs & variable costs?
Answer. Fixed costs:
Fixed costs which are also called direct costs are those items of expenses of
a business firm, which do not change with the volume of output. They remain constant as more
or less output is produced. Such costs a firm has to incur even when it stops to produce
anything temporarily. They included:
1) Rent of building and land.
2) Salaries and wages of permanent staff.
3) Interest of long-term debts.
4) Payments of insurance.
Variable costs:
Variable costs are those items of expenses of a firm which change when the
volume of output is changed. When a larger output is produced, more raw materials are
required more labor has to be hired, more fuel and elasticity has to be used, more
transportation charges have to be paid. Variable costs included:
1) Wages,
2) Costs of raw materials,
3) Cost of transportation,
4) Costs of fuel, power and electricity etc.,
Q7. Distinguish between change in demand & change in quantity demand?
Answer. Change In demand:
'Change in demand' means changes in demand due to the change in the factors other than
price. Those other factors are income, taste and preference, population, future expectation,
prices of other related commodities etc. Price remaining constant these factors bring about a
change in demand which is called "Change in demand". The change in demand involves
"increase" and "decrease" of the demand for a commodity.

4. Change in quantity demanded:
Change in quantity demanded refers to the change in the amount of a commodity as a result of
change in the price of it. Amount demanded rises or falls according to the fall or rise in price. In
such a case other factors influencing demand are held constant. The fall and rise in amount
demanded due to the change in price is technically called "contraction" and "extension" of
demand.
MACROECONOMICS:
3. Attempt any five of the following.
Q1. Explain any one method of measuring national income?
Answer. National income at product method:
According to product method, the total value of final goods and services produced in a
country during a year is calculated at market prices. According to this method only the final
goods and services are included and the intermediary goods and services are not taken into
account.
Q2. State the functions of money?
Answer.Functions of money:
1) Money acts as a medium of exchange.
2) Money acts as a common pressure of value.
3) Money acts as a standard of differed payment.
4) Money acts as a store of value.
5) Money acts as a transfer of value.
Q3. What are the merits of direct taxes?
Answer. Merits of direct taxes:
1) Justify principle of equity.
2) Justify canon of economy.
3) Justify canon of elasticity.

5. 4) Justify canon of certainty.
5) Help in sealing leakage.
Q4.Highlight the impact of inflation on consumers?
Answer. Inflation on consumers:
Inflation means a rise in prices of goods and services in an economy over a period of time.
Inflation is caused by some demand side factors (Increase in money supply, Increase
in income, Black money spending, Expansion of the Private Sector, Increasing Public
Expenditures) and some Supply side factors (Shortage of factors of production, Industrial
Disputes, Increase in exports (excess exports), Global factors, Neglecting the production of
consumer goods).
Q5. Write down canons of taxation given by Adam smith?
Answer.Canon of taxation by Adam smith:
Adam smith, the father of modern
political economy, has laid down four principles of taxation in his famous book “wealth of
nations”. These principles are:
Canon of equality of ability:
According to Adam smith “the subjects of every state ought to contribute towards the support
of the government as really as possible, in proportion to their respective abilities, i.e. in
proportion to the revenue which they respectively enjoy under the protection of the state”.
Canon of certainty:
According to Adam smith “the tax which each individual has to pay ought to be certain and not
arbitrary. The time of payment, the amount to be paid, ought to be clear and plain to the
contributor and to every other person”. The individual should know exactly, what, when a how
he is to pay the tax, otherwise, it causes unnecessary suffering. Similarly, the state should also
know how much it would receive from tax.

6. Canon of convenience:
Adam smith wrote “every tax ought to be levied at the time or in the manner in which it is most
convenient to pay”. In these cannon, the two elements, time and manner of payment, must be
convenient for the tax payers so that he is able to pay his taxes in de time.
Canon of economy:
Adam smith said “every tax ought to be so contrived as both, to take out and keep out of the
pockets of the people as little as possible over and above what it brings into the public treasury
of the state”. This canon implies that the expenses of collection of taxes should not be
excessive. They should be kept as little as possible, consistent with the administrative
efficiency.
Q6. Distinguish between domestic trade & international trade?
Answer. Domestic trade:
1) Domestic Trade: Free to move around factors of production like land, labor, capital and
labor capital and entrepreneurship from one state to another within the same country.
2) Domestic trade: easier to move goods without many restrictions. Maybe need to pay sales
taxed.
3) Domestic trade: same type of currency used.
4) Domestic trade: limited market due to limits in population, etc.
5) Domestic trade: speak same language and practice same culture.
International trade:
1) International Trade: Quite restricted.
2) International Trade: Restricted due to complicated custom procedures and trade
barriers like tariff, quotas or embargo.
3) International trade: different countries used different currencies.
4) International trade: Broader markets.
5) International trade: Broader markets International trade: Communication challenges
due to language and cultural barriers.
Q7. Name the phases of business cycle & state briefly any one of them?
Answer. Name of business cycle:

7. There are four phases of business cycle are,
1) Depression.
2) Recovery or revival.
3) Boom or prosperity.
4) Recession.

8. SECTION“C”
Detailed question & answer
Microeconomics:
4. Attempt any one of the following parts.
Q1.Economics is the science of scarcity & choice, examine critically?
Answer. Lionel Robbins:
According to Lionel Robbins,
“Economics is the science which studies
human behavior as a relationship between ends & scare means which have alternate uses.”
This definition, in fact, is based on the following four basic propositions, i.e.
1) Human wants are unlimited.
2) Means are limited.
3) Wants are not equally important.
4) Means have alternative uses.
These basic propositions are elaborated further.
Human wants are unlimited:
The fundamental fact of a means economics life, on which
Robbins definition based, is that man’s ends, i.e. wants are unlimited. If one wants is satisfied,
other one corps up immediately. Due to such unique aspects of wants, a stage in man’s life
never comes when all his wants are fully satisfied after death.
Means are limited:
The second basic factor which gives rise to an economics problem is that,
contrary to ends, means namely resources to fulfill unlimited wants are limited. If the resources
like wants were also unlimited then no economic problem would rise.
Wants are not equally important:
All the wants are not equally important. Their
variance in importance forces man to satisfy them according to their importance. First of all he

9. prefers to satisfy his necessities and then think about comforts. At last, he thinks about his
luxuries.
Means have alternative uses:
Through the means are scare yet they have many
alternative uses. In other words, limited resources can be put to various uses. The man has to
choose the best way of utilization the scare resources to get the maximum satisfaction from
them.
Major merits of Robbins definition:
Major merits of Robbins definition of economics
are of the following kinds,
1) Robbins defined economics in an analytical way.
2) He based his definition on some solid reasons.
3) He clearly defines the scope of economics.
4) It identifies central problem of economics.
5) It clarities the concept of human behavior.
Q2. State the law of demand & explain if with the help of diagram & schedule. Also state to
assumptions?
Answer. Law of demand:
“Other things remaining the
Same, if the price of a commodity falls, the quantity
Increases and decreases with a rise in price.”
Justification for the Law of Demand:
There are two reasons for the law of demand. Consider why you would buy more of a good as
the good's price is lowered, all other things remaining the same.
1. When the price of the good is decreased, you can afford to buy more of it. For instance, if
the price of shrimp falls by 50% you will probably eat more shrimp since you can afford to buy
more shrimp. This effect is known as the income effect.

10. 2. When the price of a good is decreased, you will probably buy more of it since it is a better
bargain relative to other goods. For instance, if the price of shrimp falls by 50% you will
probably eat more shrimp since shrimp is a better bargain relative to fish and oysters. This
effect is known as the substitution effect.
Factors that Cause a Change in Demand:
A change in income will cause a change in demand. The direction in which a demand curve
shifts in response to a change in income depends on the type of good represented by the
demand curve. There are two types of goods:
i) Normal Good. A normal good is one in which the quantity demanded at any price
increases with income. This means that an increase in income will shift the demand curve for a
normal good to the right.
ii) Inferior Good. An inferior good is one in which the quantity demanded at any price
decreases with income. This means that an increase in income will shift the demand curve for
an inferior good to the left.
Macroeconomics:
5. Attempt any one of the following.
Q1.State quantity theory of money & explain it with the help of an equation?
Answer. Quantity theory of money:
Quantity theory of money asserts that the value of money depends largely on the quantity of
money. If the quantity of money is increased, without corresponding increase in volume of
production, the value of money will decrease and vice versa.

11. “Double the quantity of money, while other things remain unchanged, price will be twice
as a high as before; half the quantity of money, price will be one half of what they were before.”
Statement of theory:
According to Lrwing fisher,
The Theory’s Calculations
In its simplest form, the theory is expressed as:
MV = PT (the Fisher equation)
each variable denotes the following:
M = Money supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services
PT=MV+M'V'
OR

12. Q2.Define national income & explain the various concepts of national income?
Answer. National income:
The Labour and capital of a country, acting on its natural resources,
produce annually a certain net aggregate of all kinds of goods and services. This is the national
income of that country.”
National income (NI) or national income at factor cost:
National income at factor cost is the income received by the factors of production. The sum of
all the wages and salaries, rent, interest and entrepreneurial profit is called national income at
factor cost. It can be calculated by deduction indirect taxes and adding subsidies to NNP thus:

13. NI = NNP – indirect business taxes + subsides
Indirect taxes are subtracted as they are not the income of the factors of production and
subsidies are added as they become the part of the factor income.
Personal income (PI):
all the income is not actually received by the individuals. Social security contributions are
deducted (benevolent fund, gratuity, zakat) before the individual receive their income. Some of
the income earned by the organizations is not distributed and reserves are created out of
profits. Corporate taxes are levied on profit before distribution. These things are not received
by individuals; we must subtract them from national income to arrive at personal income. On
the other hand, the transfer payments that individual receives form government, are not
included in the N.I and hence must be added to arrive at P.I.so:
P.I = NI – social security contribution – corporate taxes-undistributed profits + transfers
Disposable income (D.I):
When the individual receive their income, they have to pay federal, provincial or local taxes;
Rest of the money can be spent by them, which is called disposable income. DI can defined as
follows
DI = P.I – direct income tax payments
Per capita income (PCI):
It is the average income of an individual and is defined as
P.C.I. = total national income/population.